The installment land contract is known by several names, such as, “contract for deed,” “bond for deed,” “conditional sale of real estate,” “contract for sale of land,” and “land contract.” It is commonly called an “installment land contract,” and is distinctly different
from a binder contract, or earnest money contract.
The binder contract is used:
• To hold property off the market until the prospective buyer can obtain needed money to close the deal. What are they?
• To bind an agreement until the seller produces proof of title.
• To bind an agreement until some other condition necessary for the final sale agreement is met.
The term of the binder contract is usually quite short and ends with the final closing of the deal. In contrast, the time period covered by the installment land contract is usually 5 to 10 years, or longer.
Land Contracts are a form of owner financing of real estate. An owner and a buyer enter into a contract in which the owner agrees to give the buyer a deed after the buyer pays the owner a certain amount of money. Usually the contract requires the buyer to make payments over time with interest payable on the unpaid balance. After the buyer pays all of the payments called for under the contract, the owner gives the buyer a deed to the property. During the term of the contract for deed, the buyer is entitled to possession of the real estate and may be required to keep the property insured and pay the real estate taxes, or reimburse the Seller for same.
Advantages:
*Closing costs are usually low.
*Other financing may not be available for Buyer due to credit issues or lack of funds.
*Seller may gain interest income.
*Interest terms may be more favorable than conventional rates.
- Younger Buyers may not find other sources of financing.
Disadvantages:
*Process of foreclosure (or cancellation of a contract for deed) may be shorter than foreclosure of mortgage. This may be an advantage to the Seller.
- Property may be depreciated in value after cancellation and repossession by Seller.
*If there is a mortgage on the property, the contract may violate a due-on-sale clause in the mortgage, which the lender may or may not seek to enforce.
*Buyer may lose investment payments that are made and then the Buyer loses the home. Of course, this may also apply in a mortgage situation.
All states require that a contract concerning real estate, like a Land Contract, must be in writing. In all States a contract may be recorded to evidence the agreement. However, sometimes the parties do not want the terms of their agreement disclosed and therefore do not record the contract. As a buyer under a contract such as this, you should have the document recorded to protect your interest!
Possible Problems:
*Seller may not pay existing mortgages and result in foreclosure. To assist, the contract may contain a provision obligating the Seller to pay the mortgages.
*Buyer loss of investment. The contract may contain a reinstatement provision to protect the Buyer from being prematurely evicted.
The Basics
An installment land contract should always be in writing. State laws require that all contracts for sale of land be in written form in order to reduce the possibilities of misunderstanding between the seller and buyer.
Minimum Legal Requirements
The minimum information legally required in the written agreement includes:
- Identification of the seller and buyer.
*An adequate description of the property.
*The purchase price or other consideration.
*The parties to the contract who are obligated by the agreement must be identified by their legal names.
*The seller’s spouse and any other party who has ownership interest in the property should be included in the contract so the buyer will be guaranteed the participation of the spouse in the later transfer by deed.
- The land description is adequate if the land can be located by referring to the installment land contract. The description should be a formal, legal one. Usually this description is in terms of the Rectangular Survey System, also called the government survey method, using sections, townships, and ranges.
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The total price agreed to by buyer and seller must be stated although the exact conditions of the payment need not be specified. It is highly recommended, however, that such terms be spelled out in detail to avoid controversies.
*Signatures - Signatures of all parties named in the land contract should be obtained. If a corporation acts either as seller or buyer, the instrument must be signed by an officer with proper corporate authority, and in some states, the corporate seal should be affixed. If a partnership is the buyer or seller, all partners should sign the contract. If the contract is to be recorded, the signatures should be made before a notary public or otherwise acknowledged.
*Sufficient copies of the installment land contract should be made so each signer can have a copy.
*The original is usually returned to one of the parties after it has been recorded.
Title insurance is sometimes used to assure the buyer of adequate title to the property in lieu of the attorney’s review of the abstract of title. This form of insurance is not available nor is it legal in all states, however. Title insurance is usually based upon an
examination of the record title, either by a lawyer or experienced lay personnel. If title insurance is used, the buyer should realize the insurance company is simply stating that it will pay the buyer the face amount of the policy (usually equal to the price paid for the property), under certain conditions, if the title is not good.